What do Conservative MPs know about money?

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On August the 19th we started an email campaign to highlight the startling results of the poll that showed that only 1 in 10 MPs understand that 97% of money is created by banks, we have encouraged all Positive Money supporters to email their MP and ask them to confirm that they are aware of these 3 facts:

  1. Around 97% of money in the UK consists of electronic bank deposits in people’s bank accounts
  2. That banks create these deposits when they make loans
  3. That when people repay loans, the money is destroyed and disappears from the economy

Around 1600 people have emailed their MP’s so far and many have already received the responses from their MP’s. Quite a big part of these responses were a variation on a standard party response.

For all their inaccuracies, it is good that these responses had to be made. Some people have gone the next step already by emailing back or arranging a meeting. It seems we can make a difference.

This is the first blog in a series about the standard MP responses. In today’s blog we’ll have a look at the standard response of Conservative MP’s. Check out this space for our next blogs on the standard responses of other major parties.

MP’s letter in italics:

First, I understand that Steve Baker, Caroline Lucas, and Michael Meacher are looking to get a debate on the issue of money creation in Parliament. However, it is for them to put their case to the backbench business committee who will decide if it gets put forward to be debated.

conservative MPsSo if you are like me and have a Conservative MP, this is what they say. I am happy that Jeremy Hunt, William Hague and his colleagues are aware of the pending back bench debate. This means that we can ask them to go along. The intention of the debate is awareness raising and as this issue is so important there should be some enthusiasm for attending.

With respect to the wider debate about the ‘creation of money’, though banks maintain a fraction of deposits in cash reserves and lend out the remainder, I can assure you they also remain obliged to redeem all deposits on demand.

This description is inaccurate and the banks being obliged to redeem deposits on demand does not, in any way, address the power they are given to create money and also decide where that money can be spent. Mostly, banks lend for mortgages and speculation on the stock market. See this chart on where banks lend.

This system is fundamental to the availability of credit and plays a vital part in supporting the economy.

Like many policy makers, Conservatives assume that stopping banks from creating money will restrict the economy in a negative way. This is because in the current system, banks are the only source of new money to the economy. However, if the Bank of England were to create ‘sovereign money’ directly, this money could be spent into the economy, supporting businesses, jobs and real economic activity, but without rising levels of debt. More on this here:

Would Positive Money reform lead to a reduction in credit available to businesses?

I welcome the sweeping reforms the government has already made to both our financial regulatory system and to the structure of the banking system itself in recent years since the banking crisis.

It seems that nothing has changed in spite of these reforms, possibly because the reforms do not address the structural issues with the banking system.

This includes the creation of the Financial Policy Committee (FPC) that has been given the tools to see emerging risks, including the housing market, other capital ratios and make recommendations on loan to income ratios and loan to value ratios to maintain the stability of the financial system. 

When the FPC sees the emerging risks, what will they do about them?

 

We need to keep asking questions of our representatives and we value your help emailing, writing, meeting and inviting your MPs to events. Please see if you can take them to the next step of understanding. Having a meeting is a good way to achieve this. Here is our briefing for meeting your MP.

 

See also: 

What do Liberal Democrat MPs know about money?

What do Labour MPs know about money?

 

 

 

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  • jamesmurraylaw

    This is very good indeed as an illustration that individual MPs do not know basic economics and , certainly not the ‘new’ economics espoused by positive money (yes I know it is ~70 years old)

    What I would like to see as a permanent page on your landing page is a summary comparing what each of the political parties say about:

    1. Whether they accept that the banks in effect create the money supply

    2. Whether they accept that QE increases the National Debt and only ~10% ends up going through the hands of the banks to industry, outside of commercial property purchase.

    3. Whether suggested by PM. they accept the availability of the immediate and comparatively ‘pain-free’ injection of £10 billion

    Paint them into a corner PM – the ‘standard’ bland answers there MPs have given out are so easy to destroy.

    I suggest your many political questioners also ask their MPs to ask of the Commons Library the above or more salient questions to satisfy the MPs themselves of the veracity of the tenets of PM – print them out to make it easy.

    As all MPs feel they are hamstrung by lack of money for their favourite projects, some of them I feel would be pleased to ask in a written commons question whether the BoE could indeed painlessly ‘create’ £10 billion and what would be the consequences…

    • Shirley Wardell

      Thanks for your insights James. The standard answers are pretty bland and a bit of a fog. I am pleased that the standard and foggy answers are changing and showing that some messages are getting through.

  • Richard Sage

    How many more times must it be said – BANKS DO NOT LEND OUT RESERVES

  • RJ

    2. Whether they accept that QE increases the National Debt and only
    ~10% ends up going through the hands of the banks to industry, outside
    of commercial property purchase.

    It doesn’t of course. QE is simple an asset swap. Where bonds held by banks are swapped for reserves (one bank asset is swapped for another one). So it neither increases the national debt and does not end up going through the hands of the banks to industry. Reserves are the banks and treasuries money. Not our money

    • Shirley Wardell

      It needn’t be a deficit though. It could be ‘sovereign money.’

    • Simon

      RJ we don’t have to have debt or deficit, just sovereign money created

      • RJ

        Money is a financial asset. Financial assets are always backed by a financial liability held by another party (it called debt by that party). Thats just the way the world is. Debt free money is not possible. Its seems convincing but its actually impossible. What is possible is just as good though. The UK Govt is monetary sovereign and has been since the 1970s. Google what this means. Its almost too good to be true if you want a fairer world. Fear is the only thing that stops it. (Fear of Govt debt). if people can overcome we can start to enter an age of property and abundance. Rather than debt slavery.

        • Simon

          I disagree with your analysis that creating debt free money is not possible, and money always has to be a financial asset with a corresponding liability. We could print money, (at the same rate that existing debts are repaid which destroys money) so the money supply is stable, and use the newly printed money to be spent on something socially useful like improving our crumbling roads, build a new hospital, or upgrade our railways. At present the only options are higher taxes or more borrowing if we want to spend more on socially useful things we all want, or relying on “economic growth”. We would have to review the situation if all debts were repaid – impossible with the present system, although new money could then be created to match population growth, new infrastructure and business.
          Your view is not far away from Positive Money, but the more we argue amongst ourselves, the less time and energy is spent in reforming the present corrupt system. I accept that if I have £1, then I have an “asset”, and I am owed goods or services to that value, although I hope we can see the bigger picture here, and not get into a minor diversionary debate about the nature of money.

          • Simon

            The other problem with more deficit spending as you suggest is that debt, or part of it has to be repaid by the tax payer

          • RJ

            This is not correct. Govt debt in TOTAL does not have to be paid back by the taxpayer. And really Govt debt should never be reduced in total as it will make the non Govt sector poorer. This would almost certainly cause a depression. As the poorer non govt sector would incur company losses.

          • Simon

            I am sorry RJ your view of this and mine are different. The Bank of England would create electronic money, free from political influence, to be spent into the economy by the government on useful projects, no debt to anyone. They may decide not to print any money in a given month because it could cause inflation.

          • ms01925

            Its funny to read these conflicting opinions… all of the ways we think the system might “work”, are really just all the possible scenarios open to the banking system of how they can manipulate the system.

          • jake

            nothing wrong with increased deficit spending. The Deficit is simply spending which exceeds taxation (G>T).What you are talking about it the public borrowing which the govt chooses to match with the deficit to “finance” it.

          • Simon

            The deficit is borrowed and at least part of it plus interest is paid back by the tax payer

          • RJ

            Jake is correct. re what you have posted. The deficit is not borrowed. the Govt like the banks simple create new money (reserves) by JE whenever the spend. And then drain these reserves by either tax (that makes us all poorer) or by issuing bonds once again created on a computer screen. So no borrowing. Unlike us, companies, state Govts or Euro countries that do need to borrow money. At the market interest rate. If you are interested in reading facts try Warren Mosler’s free ebook The 7 Deadly Innocent Frauds of Economic Policy. Easy read and is factual. He understands the UK and US treasury system. Most do not. “This book reviews 7 ‘innocent frauds’ that I suggest are THE most
            imbedded obstacles to national prosperity. The first 4 concern the
            federal government budget deficit, the 5th addresses social security,
            the 6th international trade, and the 7th savings and investment.”

          • Simon

            The government does not create money when they spend. Neither is money destroyed by taxation because it is usually spent again immediately, unless the government uses some tax revenue to pay down the deficit / national debt. Even then, the holder of the gilt like me, or a pension fund gets their money redeemed. They use income from taxation, selling off state assets, or borrow it from investors like pension funds, and others holding gilts to fund spending. The only money created is if a commercial bank lends them money by buying gilts in return. The commercial bank has created the money in the same way as giving me money for a mortgage. Obviously yours and Warren Mossler’s understanding of the system is different to mine.

          • RJ

            “The government does not create money,” They do.This is an indisputable fact. New reserves are automatically created (and bank credit) whenever the UK Govt spends
            “Neither is money destroyed by taxation” Reserves are always destroyed. This is also a fact. Credit is also destroyed but only when a non bank buys the bonds
            “borrow it from investors like pension funds,” NO new bonds are created and new money and new reserves (from spending) are used to settle with the new bonds. So the spending / new money / new reserves comes first. That’s why there are huge excess reserves held by banks
            Warren Mosler
            “The Fed [BoE[ is the monopoly supplier of net reserves to its banking system, and, therefore has no option but to set at least one interest rate.” the reserves comes mostly from Govt spending. Banks need reserves and the only place they can get them is the BoE

          • Simon

            What do you mean by reserves and where do they come from ? I dispute it is an indisputable fact. Nearly all money is created by the commercial banks when they make loans and that is where you and I part company.

          • RJ

            Reserves are BoE reserves. They come from Govt spending mostly. And agree our money is created by the commercial banks (from loans but also from GOVT SPENDING. The bank JE is DEBIT BoE Reserves CREDIT a Bank account when the Govt pays someone).
            But there are different types of money.
            Level one money is the banks and treasuries money. (BoE reserves) They use this to settle with each other. We could all have an account at the BoE. But then there would be no choice of bank.
            So level two money was set up (bank credit) where one reserve equals one bank credit. So we all have accounts at commercial banks (not the BoE). And when we transfer money from say RJ to Simon (paid for a car say). Banks transfer this credit (money) between our accounts. And the BoE transfers an equal number of reserves between the banks accounts.
            Level 3 money is notes and coins. Where one bank credit = 1£1 notes or coins. N+C are a token representing bank credit.

          • Simon

            RJ have a look at my reply to you on the “Printing Money : Good!” post. Are you suggesting that the government has an account at the B of E which they use for transactions ? They still have to get money in from somewhere as I describe elsewhere before they spend, so in that sense they are not creating money. The reserve accounts you refer to overlap with real money which you and I use as I decribe in my other post on the banking system. If the government creates money as you suggest, why are we struggling though this age of austerity, and paying £70 billion public debt interest each year ? I dislike the present system as much as you do and think it is totally unnecessary pain.

          • RJ

            Austerity is unnecessary (and economically bad for the UK). Its based on a flawed belief that monetary sovereign Govt are just like households. Read any MMT site. Especially Warren Mosler. I don’t agree with all but he does understand how tehe treasury system operates

            Government $deficit = non government $surplus (net financial assets)

            Operationally, government spending is not inherently revenue constrained.

            Any such constraints are necessarily self-imposed.

            In the banking system, the causation runs from loans to deposits, that is,

            ‘loans create deposits.’

          • ms01925

            Actually the government dos not create money for deficit spending. it creates bonds, which have an interest attached, and sells these on the market. Banks can then create the money to buy these bonds, and use those self same bonds to back that money creation. They then collect interest on those bonds… essentially fleecing the public by yet another method.

          • jake

            They spend by creating deposits in the private banking system.Any coincident issuing of government debt (bonds) has nothing to do with “financing” the government spending.

          • RJ

            What do you mean by print money? (at present when the UK actually print notes and coins the BoE holds the debt to back this printed money. If these notes were then used to back Govt spending the debt would pass to the Govt.) But using reserves (called printing money) is a lot simpler. It done by JE rather than the expenses of printing actual notes etc

          • RJ

            “At present the only options are higher taxes or more borrowing if we want to spend” Google monetary sovereignty

            And the current system is not corrupt. The danger is we loss it as the Euro countries have. Then its lost forever with almost no way back.

  • Ben Kelly

    Well we can see pretty clearly who answered incorrectly in the Dods Monitoring Poll can’t we

  • murrayzz1

    It is beyond belief that the Tories official response includes the phrase “… banks maintain a fraction of deposits in cash reserves and lend out the remainder”.

    Lend out the remainder?

    This tends to indicate that they believe all bank lending comes from deposits. The depth of ignorance is truly frightening.

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